The Creative Way to Finance Investment Properties You Probably Haven’t Discovered Yet

It wasn’t long ago that you had to wait several months after the purchase of a property (investment or owner occupied) to get your money back out of the property by doing a cash-out refinance transaction or getting a home equity line of credit. In early 2014 that all changed, but many investors don’t even know that this type of financing exists.

Fannie Mae, the leading source of mortgage credit in the United States, changed their requirements on seasoning for all conventional mortgage loans. Again, investment or owner occupied. So what does that mean for you as an investor? It means that you can immediately start a refinance transaction the day after your purchase closes without having to wait any length of time before doing so.

Think about that for a second. You as an investor can now get a bunch of your cash out of the deal (albeit not all of it) immediately after the close of your initial purchase escrow.

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What I Like About This Loan

As the saying goes, “cash is king.” This statement holds especially true with investment real estate on the buy side of a transaction. Cash gives you leverage in a deal. Cash gives you the opportunity to close quickly.

When multiple offers are out on a property, cash deals may afford a lower asking price, but still win out because of this ability to close quickly. Realtors love all cash deals because they think of fast paychecks. Quite frankly, everyone involved wants all cash deals for the same reason: the ability to close quickly so everyone gets what they want.

The buyer gets the property. The Realtors get paid. The escrow officers or closing attorneys get paid. The seller gets paid. Everybody wins.

Delayed Financing at Work (The Steps)

Oftentimes it’s difficult to wrap your brain around how some of these loan products work. The possibilities are endless and can often create analysis paralysis. We’ve all been there before — we can visualize what it is that we need to do in order to do something, but we come up with questions and objections in our head as to how not to do something. We over-analyze, and it creates a paralysis of the mind.

What I’ve done for you below is to lay out what I think would be a great step-by-step process for you to be able to use this creative financing strategy to purchase (and subsequently refinance) your investment properties using the cash that you have available, your good credit, and your solid income to obtain properties.

As an investor who has cash (or access to cash through other means like a partner), go out and talk to some of your local lenders about delayed financing. Not everybody has this product, so you’ll most likely have to find a broker who has this niche product in your portfolio.

Find an investment property that you can purchase with all cash. You’ll most likely want buy and hold properties for this strategy, so make sure your numbers still look good even if you add in the debt service (new loan). Close on it quickly with all of your cash. Remember that cash gives you the upper hand in negotiations with sellers and their agents. If you can’t get the terms you want by purchasing at a discount, then move on to the next one until the numbers work for you.

Immediately after the initial transaction is done, apply for delayed financing with the local lender. This shouldn’t take more than 30 days to complete the entire transaction, especially if you’re prepared.

[See my first two articles on the BP blog to figure out exactly what it is that you need when applying for a traditional mortgage loan for investment property.]

While your first investment property is going through the refinance loan process using the delayed financing, find another property less than or equal to the amount of money you can take out. Typically, a lender will allow you to cash out 70% of the appraised value of the property. This applies to the delayed financing as well. Again, make sure the numbers work for cash flow after the debt service is in place.

When you get your initial money back from the first delayed financing transaction, move quickly on the second property you’re looking at. Use the cash you’ve obtained to purchase the first property and close quickly on the second property.

Repeat steps 1-5 as many times as possible using the delayed financing. There are limits to the number of financed properties, but I would imagine that you’d be able to do this once or twice and be successful at adding properties to your portfolio.

How Fannie Mae & Lenders Underwrite Delayed Financing

Traditional underwriting guidelines for Fannie Mae loans still apply, and some lenders may place overlays on these restrictions, but for the most part you can still get cash out of a deal. The delayed financing loan system works for all residential properties from 1-4 units. So if you wanted to buy a series of 4-plexes using this method, it is possible. (In fact, I kind of like the idea of buying 4-plexes using this method: more units, more cash flow per unit.)

Here are the basic underwriting guidelines according to Fannie Mae:

The borrowers must meet Fannie Mae’s borrower eligibility requirements. You can look these up online if you really want to know. Otherwise, let your loan officer worry about it.

The original purchase was documented by a HUD-1 Settlement Statement which confirms no mortgage financing was used to obtain the subject property. This is standard for just about all residential loans.

The sources of funds for the purchase transaction were documented. Make sure you have a paper trail if the money has been in your account less than two months. If you’ve had the money more than two months, you most likely won’t have to worry about the paper trail, but you’ll still have to document where it came from (like a savings account, checking account, etc.).

The new loan amount, with the cash-out refinance, cannot be more than the actual documented amount of the borrower’s initial investment in purchasing the property. In other words you can’t take out more money than you used to obtain the property.

All cash out eligibility requirements are met with exception to the continuity of obligation, which need not be applied. The continuity of obligation means that one of the borrowers on the existing mortgage is also a borrower on the new mortgage secured by the subject property. Again, this isn’t something you have to worry about.

Overall, the delayed financing system tends to be very under-utilized by investors for purchasing investment property. If you have the correct system in place to find a great lender or broker who understands what you’re trying to accomplish, the delayed financing strategy should work well for you going forward to help you finance your investment property in a creative way.

What about you? Have you ever used delayed financing in your real estate investing endeavors?

Submit your questions and comments below.

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About Author

Jeff Trevarthen is the broker/owner of Veritas Mortgage, a boutique mortgage brokerage in San Jose, California. With 10+ years in real estate finance, Jeff is an expert at coming up with creative loan solutions for all types of residential real estate loans.

29 Comments

correct me if I’m wrong but this still doesn’t allow investors to realize appreciation immediately. As in buying a house for 50% of value then refi for 70%. The new mortgage will be 70% of original purchase price. I like this approach. I just wish the bank would acknowledge when I get a great deal on a property. 🙂

You are correct Joe. The benefit that i see in this for investors is being able to negotiate with cash to get the deal and then using delayed financing to get the cash out. The lender will most likely use the same appraisal. Thanks for the comment.

Unfortunately, yes, you have to keep buying cheaper and cheaper properties to use the delayed financing. But with all cash purchases, you have the upper hand and can close quickly. This loan is also used for primary residences which really makes it nice.

You said they would finance 70% of appraised price… correct me if I’m wrong, but I’m guessing it’s really 70% of appraised or purchased price, whichever is lower.

If I buy a $100k house at $70k… would they let me pull $70k out… or $49k out? Generally to go by appraisal versus purchase requires seasoning… unless you’re saying this delayed financing gets around the seasoning requirement which would be amazing.

If it is purchase price… what does this really accomplish other than allowing you to buy at a discount because of all cash? You’ve always been able to do that… and always been able to get a mortgage against a property you own free and clear. How is this any different?

I appreciate the comment Nathan. You’re correct. The lower of the purchase price or the appraisal.

The only difference between the way it used to be and the way it is now is that you no longer have the seasoning requirements to get your money back out of the property. The old rules made you wait 6 months before being able to get your money back out.

Thanks for writing this – at a very opportune moment for me! 🙂 My husband and I are currently looking for a primary residence to purchase, but wish to also purchase our first rental property. Let’s say we put $100k down on our primary home, with a value of $228k, so our actual LTV would be 56%. Are we able to immediately put our $100k equity to use after the closing to purchase our rental properties? I’m thinking this would be transactional funds for down payments, and not a full purchase price. Using it in combination with private or hard money for fix/flips or buy/holds.

Thanks for commenting Carolyn. You’ve got to purchase the property with all cash in order to make this delayed financing work for you. If you get a purchase money loan to buy the property, you’ll have to wait 6 months for seasoning before you try to get more cash out.

I just did this and it is a great method! I think that there may be some confusion in this thread however. You are completely able to refinance your full purchase price PLUS closing costs as long as the total amount financed is no greater that 75-80% of the appraised value. There is no “lower of appraised or purchased price” clause. As long as your buying properties at 70% of market value than you can get it ALL back.

Thank you for this insightful article. I noticed you said this would be a good strategy for buy and hold, but what are your thoughts about using this strategy in flips? I am just starting out and so far we have 3 flips in process that were all cash purchases. Our target turnaround time is 90 days from close of escrow (or winning bid at auction) Would this strategy work?

I would add step #2.5 – Complete renovations to get the property rent-ready, and rent out all units before applying for the next loan. I imagine most buy and hold investors purchasing properties #1-10 would need to have their new property rented out to be able to qualify for the next loan.

We got started just over a year ago by taking the equity out of our 50 acre home place and buying our first two rentals then turned around and got a line of credit on those two off of the appraised value and not what we paid for them. We then bought 4 more rentals with that. It is just a bit slower but we didn’t get diminishing value and was able to do more with it.

Jeff – great article. I had never heard of this and I’m always looking for new, creative ways to find financing.

One question I have – and I think I already know the answer but want to make sure – the cash you can get out is limited to the purchase price so that means if I buy a house for $130k and need to put in $100k in renovations, I could only potentially get back out $130k, not up to 70% of $230k. Correct?

Great article, thank you for sharing this information, it is going to help me out tremendously. I am located in VT and was wondering how I would find a mortgage broker in my area to work with in acquiring this loan? Do you have any advice or resources or are willing to share? It will be greatly appreciated. Thanks!

Thanks for this article. I’m curious about how big the “cash is king” advantage is? We bought our primary residence in cash, and never felt like we got much negotiating power from it. Now we are looking into REI and wonder about using cash… Wouldn’t 200k go farther putting 25% down on 4 properties worth 200k each. Or does the cash advantage make such a difference that you should buy one $200k property and then pull 70% out (leaving 30% in) and diminishing your remaining buying power. I would love an example comparing these.

Hi Jeff
Love your article on Delayed Financing, Quest: on the underwriting guidelines- you stated that the new loan amount can not be more than the actual documented amount of the initial investment in purchasing the property. My situation – I brought property and am currently rehabbing. The property should/will appraise at two times or more than what I purchase it for. Ex. If I paid 35k and and it comes in at 80k-90k I’m only able to refi at 35k? Or does it help if it is being used as a second home and not just an investment to obtain more funds.
Thanks